Amtech Systems, Inc.
Q4 2007 Earnings Call Transcript

Published: 13 Dec 2007

[Operator:]

Ladies and gentlemen, thank you for standing by and welcometo the fiscal 2007 fourth quarter and year end results conference call.(Operator Instructions) I would now like to turn the conference over to Mr. JimByers. Please go ahead, sir.

[Jim Byers:]

Hello, everyone and thank you for joining us this afternoonfor Amtech Systems’ fourth quarter conference call. On the call today are J.S.Whang, Amtech's President and Chief Executive Officer; and Brad Anderson,Amtech's Chief Financial Officer. After the close of market trading today, Amtech released itsfiscal 2007 fourth quarter and year-end financial results. The release will beposted on their website at www.amtechsystems.com. In addition, a phone replayof today’s call will be available beginning approximately two hours after thecall’s conclusion and remaining in effect for one week. The call replayinformation is included in the earnings press release. Before we begin, let me note that during today’s call,management will make forward-looking statements. All such forward-lookingstatements are based on information available to Amtech as of this date andthey assume no obligation to update any such forward-looking statements. Thesestatements are not guarantees of future performance and actual results coulddiffer materially from current expectations. Among the important factors which could cause actual resultsto differ materially from those in the forward-looking statements are changesin the technologies used by Amtech's customers, change and volatility in thedemand for diffusion equipment, the effect of changing worldwide political andeconomic conditions on government funded solar initiatives, capitalexpenditures, production levels, including those in Europe and Asia, the effectof overall market conditions, market acceptance risks, risks associated withdependence on suppliers, the impact of competitive products and pricing,technological and product development risks, including the risks inherent inlaunching new products, such as Amtech’s vertical furnace, and other riskfactors detailed in the company’s Securities and Exchange Commission filings,including its Form 10-K and Forms 10-Q. With that said, I will now turn the call over to J.S. Whang.

[Jong S. Whang:]

Good afternoon, everyone and thank you for joining us todayto discuss our fiscal 2007 Q4 and year-end financial results. Brad will reviewthe financials in just a moment but first, I will review some highlights fromthe fiscal year and discuss recent developments and strategy going forward. Fiscal year 2007 was a year of a transformation for Amtech,from being semiconductor dominant to becoming solar dominant. We are verypleased with our operating results during this year of our transition and oursolar revenue grew 300% and this was 27% of the total revenue in fiscal 2007compared to only 7% solar in fiscal year 2006. With the contribution from our R2D automation, awholly-owned [subsidiary] product, we generated strong growth in solar orders.For fiscal 2007, solar orders totaled more than $21 million compared to only $8million in fiscal 2006 and, more importantly, the number of solar customers weserve nearly doubled from just eight customers in 2006. For fiscal 2008 year-to-date, or for the past two-and-a-halfmonths, we have already produced approximately $19 million in solar ordersbookings, which is further evidence of increasing market acceptance of ourproduct. We remain very focused on successful execution of our solar growthstrategies and we continue to make a solid progress leveraging our technology,our strong brand mechanism, and our global presence to further penetrate therapidly growing solar cell market. To better support our growth and initiatives going forward,we recently completed a successful follow-on public offering, generating netproceeds to Amtech of approximately $33 million. In the near-term, we intend touse these proceeds for working capital to fulfill the orders that we continueto generate. In the longer term, they provide added resources of strength topursue our solar growth strategy and further expand our product portfolio. As a part of our strategy to expand our solar productportfolio, we have targeted specific additional steps in the solar cellmanufacturing process that builds on our existing competencies and leverage our[proven] manufacturing experience. We have added a second step in the manufacturing of solarcells with our exclusive licensing agreement to provide front-end manufacturingfor the PECVD process. This is the application of anti-reflective coating onthe solar wafers, which affects one of the most important steps in solar cellproduction. Our PECVD product is currently scheduled to be launched forthe end of March 2008. At that time, we expect our system to be ready forcustomers to bring their wafers and test the wafers through our PECVD machine.This process will take time as we validate the wafer production, receiveorders, and ship the product. As this ramp-up progresses, we expect PECVD to begincontributing to our order bookings in fiscal 2008. We are excited to produceand introduce this additional product and as it provides entry into asignificant segment of the solar market that could double our total availablemarket we currently serve. As a part of our longer term strategy, we are activelyseeking to add additional front-end [inaudible] steps to the solar productportfolio we provide, so that we can more fully participate in the rapidlygrowing solar markets. We continue to make progress on our stated plan andbelieve we are well-positioned to capitalize on the growth opportunities wehave. With the continued successful execution of our solar productstrategy, we believe we can increase our total available solar market size significantlyover the next three years. I will now turn the call over to Brad to review ourfinancial results and financial outlook going forward. Brad.

[Bradley C. Anderson:]

Thank you, J.S. I would like to discuss with you some of thehighlights of our successful year in 2007. For the fourth quarter, net revenuereached a record $13.4 million, reflecting continuing increase in demand forour solar products. This represents a 16% increase in net revenue over lastyear’s Q4. Solar revenue during the fourth quarter was $4.4 millioncompared to $0.5 million in solar revenue for the fourth quarter of last year.For the full fiscal year 2007, solar revenue totaled $12.5 million, up morethan 300% over fiscal 2006. Total order backlog as of September 30, 2007, reached a verystrong $23.2 million, or up 70% from a backlog of $13.6 million a year ago.This total includes approximately $17.4 million in orders from our solarindustry customers, which represents a 128% increase over the prior year butdoes not include an additional $15 million solar order received shortly afterour September 30 fiscal year-end. Backlog includes deferred revenue and customer orders thatare expected to ship within the next six to 12 months. Fourth quarter gross margin was 31% compared to 24% in thefourth quarter of fiscal 2006. The most recent quarter benefited from afavorable product mix and capacity utilization, primarily at our Tempress facilities. Through the fourth quarter, Tempress continued to operate atits older facilities and just recently in the first quarter of fiscal 2008moved production and office personnel to the new expanded facility. Operating margin for the quarter was 6% compared to 4.7% inthe same quarter a year ago, reflecting improved gross margins and higherrevenues. Net income for the fourth quarter was $1.1 million, or $0.17 perdiluted share, compared to net income of $497,000, or $0.14 per diluted sharefor the fourth quarter of fiscal 2006. Net income was positively impacted inthe quarter by the recording of a net tax benefit of approximately $300,000resulting from a reduction in the valuation allowance on deferred tax assets ofapproximately $600,000, compared to zero tax expense in the same period a yearago. For the full fiscal 2007 year, we generated record netrevenue of $46.4 million, an increase of 14% from $40.4 million in fiscal 2006. We continue to build on our broad and diverse base ofcustomers, both within the solar industry and the leading semiconductor andwafer manufacturing companies. In fiscal 2007, only one customer accounted formore than 10% of our total revenue and that customer was approximately 13%. Total revenue by geographic distribution was Asia at 52%,North America at 28%, and Europe at 20%, evidence in our continued success inpursuing and penetrating the Asian market. Gross profit for the year of $12.8 million increased by $2.2million, or 21% over fiscal 2006, driven by higher shipments during the year.Gross margin was 28% in fiscal 2007 compared to 26% in fiscal 2006, reflectinghigher capacity utilization in both segments of our business, the semiconductorand solar equipment segment and the polishing supply segment. Operating margin for fiscal 2007 was 3.8% compared to 4% infiscal 2006. This reflects continued investment in financial and operationalresources to support our future solar growth and compliance obligations. Net income for the 2007 fiscal year was $2.4 million, or$0.44 per diluted share compared to net income of $1.3 million, or $0.38 per dilutedshare in fiscal 2006. Turning to the balance sheet for a moment, as of September30, 2007, we had a cash balance of $18.4 million, long-term debt of less than$1 million, and working capital of $30.5 million, compared to working capitalof $11.9 million at the end of fiscal 2006. Our September 30 balance sheet does not include the assetsand liabilities of R2D, nor the use of cash to purchase R2D, which was acquiredat the beginning of fiscal 2008. As many of you know, to better support our strategicinitiatives going forward, we recently closed a successful follow-on publicoffering, generating net proceeds to the company of approximately $33 million.We would like to welcome many new investors to Amtech and express appreciationfor the support of our existing investors, many of whom participated in thefinancing. The outlook for fiscal 2008, for the full year fiscal 2008,we anticipate revenue to be in the range of $65 million to $75 million,representing growth of approximately 40% to 60% over fiscal 2007. Totalrevenues are expected to be the primary growth driver, while semiconductorrevenues relative to last fiscal year and consistent with overall street trendsare expected to be flat or slightly down. Gross margins are expected to remainat their annual historical rate through the first half of fiscal 2008, withimprovement occurring in the second half of fiscal 2008. Overall, for fiscal2008, we expect gross margin to be in the range of 28% to 30%. We expect selling, general, and administrative expenses, orSG&A in fiscal 2008 to continue at their historical rates or be slightlydown as a percentage of revenues. The total dollar amount of SG&A willcontinue to increase as a result of increased activity in the Asia-Pacific regionwhere we utilize third-party sales organizations, Sarbanes-Oxley compliancecosts, and increased depreciation and amortization, primarily as a result ofthe R2D acquisition and the new manufacturing facility in The Netherlands. Fiscal 2008 is the first year that Amtech will be requiredto comply with section 404 of the Sarbanes-Oxley Act, which requiresmanagement’s assessment of its internal controls over financial reporting andan additional assessment by the company’s external auditors. Operating income for fiscal 2008 is expected to more thandouble compared to fiscal 2007 as a result of higher revenues and improvedgross margin. Turning to the first quarter of fiscal 2008, we anticipaterevenues to be in the range of $11 million to $12 million, representing growthof approximately 16% to 27% over the first quarter of fiscal 2007. Revenues are expected to be down sequentially due to thetiming of shipments and acceptances of several systems moving into the secondquarter of fiscal 2008. Operating results for the first quarter of fiscal 2008 areexpected to be break even to negative due to lower revenues, higher operatingcosts discussed above, and increased production personnel. This concludes the prepared remarks section of ourconference call. Operator, please open the call to questions.

[Operator:]

(Operator Instructions) Our first question comes from theline of Ramesh Misra with Collins Stuart. Please go ahead.

[Ramesh Misra -Collins Stuart:]

Good afternoon, guys. I have not seen your Q yet so can youtell us what the actual shipment dollars were in Q4?

[Bradley C. Anderson:]

Sure. That was -- shipments in Q4 were $13.5 million.

[Ramesh Misra -Collins Stuart:]

Okay, and can you provide an estimate of where shipments couldbe in the first quarter?

[Bradley C. Anderson:]

The shipments, we do not give a breakdown between shipmentsand revenue recognition from deferrals, whether we have deferrals orrecognition in the quarter.

[Ramesh Misra -Collins Stuart:]

Okay, I’m trying to get a gauge, Brad, of the revenuerecognition deferment. Can you help us some way to get a better feel for that?

[Bradley C. Anderson:]

Sure. Well, in our prepared remarks and also in the pressrelease, we did talk about several shipments slipping or moving into the secondquarter, in addition to some acceptances. The majority of the -- if you look atthe significance of the two, it would be more on the shipment side than on therevenue recognition side.

[Ramesh Misra -Collins Stuart:]

I’m sorry, say that again?

[Bradley C. Anderson:]

If you looked at the significance between the two, it’s moreon the movement of shipments into Q2 than acceptances. Again, it’s -- when youlook at some of our solar furnaces, as we’ve said before in various investorconferences on the road show, they can range anywhere from $600,000 to over $1million, depending on the level of automation, the number of reactor tubes thatwere requested by the customer. And to the extent you have systems that aretowards that higher end of the range and you get one or two, as I mentionedbefore, either because of customer desire or you just don’t have all the partsin to assemble it or however that may come about, and that shifts into the nextquarter, a week or two, that can have a significant impact and that’s what’shappening in Q1.

[Ramesh Misra -Collins Stuart:]

I see. In regard to your R2D acquisition, can you provide anestimate of where the 2007 revenues are shaping up to be and their contributionin the December quarter?

[Bradley C. Anderson:]

The R2D, as you’ll recall, was a vendor, key supplier to usof automation equipment for our solar furnaces. And strategically, we wanted tosecure that channel, supplier channel and lock it up to be only for us and wedid that through the acquisition. Historically, their revenues have come traditionally fromthe semiconductor market. As they’ve expanded their relationship with us and asour orders have grown, as you’ve seen in our announcements, their revenues willheavily shift from being semi to solar dominant. On the semi side, they are selling automation type tools toprimarily in the European and some of the North American markets. And thosemarkets in 2007 have been soft and also going into 2008, so there we have notgiven specific individual contributions by any of our various subsidiaries,whether it be R2D or Tempress, but overall they are making a significantcontribution to our ability to generate the solar orders that we have to date.

[Ramesh Misra -Collins Stuart:]

So will you be pursuing the standalone semiconductorbusiness that the company had prior to this acquisition?

[Bradley C. Anderson:]

We will continue to do that. However, we continue to growthat business and bring in people as quickly as we can and the focus will be ongrowing the business overall, with an emphasis on solar. The semi business willstill be there, will continue to pursue opportunities that come our way but themain reason for that acquisition was the solar technology and products of R2D.

[Ramesh Misra:]

Okay. Switching back again to the deferment of someshipments, obviously trying to get a better understanding of that, clearly yourorders have been very, very strong so is this deferment on account of a requestby customers or it is on account of tooling issues or ramp-up issues atAmtech's internal facilities?

[Bradley C. Anderson:]

Well, it’s a combination of that.

[Ramesh Misra -Collins Stuart:]

Okay, so like as we mentioned in the shipments versusacceptances, or can you give us a sense of which was the dominant aspect of it?

[Bradley C. Anderson:]

Yeah, well, between the shipments and acceptances, thedominant aspect was shipments.

[Ramesh Misra -Collins Stuart:]

Right, but in terms of shipments, whether it was thedominant part was customer deferment or your ability to get those parts over tothem.

[Jong S. Whang:]

I believe there was one customer. There were the two systemsand supposed to be shipped to the newly expanding locations in Europe and that[has shifted their plan] by customer and requesting that product to be shippedto Asia rather than the designated Europe. As far as I understand, they no longer want to establishthis particular European location for their solar cell manufacturing and sothey are taking it back to Asia. So it is a shifting in their facility plansfrom Europe to Asia probably is what is contributing to that.

[Ramesh Misra -Collins Stuart:]

I see. So that is actually fairly significant. I mean, twosystems could be on the order of anywhere from $1.2 million to as much as about$2 million, and so the delivery of that got relocated, basically.

[Jong S. Whang:]

Right. I believe that was what was causing that and as yousee, we are giving our 2008 guidance, revenue guidance between 65 and 75, andso from Q2, the average shipment has to be over $8 million to really meet andsurpass that.

[Ramesh Misra -Collins Stuart:]

Right. Okay, so whatever this -- by the way, before I canget into that part, J.S., any other factors other than this -- besides for thisroughly $1.5 million to $2 million deferment due to a relocation of delivery,what was the other component? Was the other component all just acceptance?

[Jong S. Whang:]

Let’s see -- no, I think acceptance probably is a lesserdegree. [All those], I cannot precisely quantify and in the process of movinginto newly expanded building from a smaller manufacturing site we’ve beenoperating for many years, and that probably has did not help our overallproductivity, so that probably has also something of -- in a small waycontributed to that. But as Brad said, all of our productions are now quitefunctional into new expanded buildings and so we will -- [inaudible] here onout and meeting our 2008 guidance numbers.

[Ramesh Misra -Collins Stuart:]

Okay, so all of these three sites which were consolidatedinto one central facility, was this -- were these facilities in your Tempressbusiness?

[Bradley C. Anderson:]

That’s correct. That’s our Netherlands operation was inthree fairly -- they are fairly close to each other into one facility a couple--

[Ramesh Misra -Collins Stuart:]

Okay, so this was that one facility where you had sayroughly 28,000 square foot expansion recently? Is that right?

[Bradley C. Anderson:]

Correct.

[Ramesh Misra -Collins Stuart:]

Okay. Now, these shipments which basically got relocated,well, clearly you should be -- it’s probably like just few days delayed, so isthere any reason why you think that that should not spike back into the Marchquarter?

[Bradley C. Anderson:]

No, no reason to not expect that.

[Ramesh Misra -Collins Stuart:]

Okay, so then March might be -- March would be, well, Iguess -- I hate to use the word abnormally but I guess it will be abnormallyhigh from Q1 levels, at least on a sequential quarter over quarter basis.

[Bradley C. Anderson:]

We can’t give any specific guidance than what we’ve given,but we’ve given overall guidance and essentially if you do the math and look atwhat’s left to come in based on our range, that definitely would indicatewhat’s going to happen.

[Ramesh Misra -Collins Stuart:]

All right. In fact, that definitely clarifies the Q1 revenuesituation quite significantly. Next, in regard to orders from yoursemiconductor customers, can you qualitatively address that? What are thetrends over there, basically?

[Bradley C. Anderson:]

The trends overall from a -- 2007 actually overall for uswas a decent year, with basically a book-to-bill of essentially one towards thesemi side of the business in 2007. Going into 2008, we’d love to have the samevisibility that we do with the solar orders. It just doesn’t happen because alot of our business on the semi side is parts and recurring type revenueconsumable types through our P.R. Hoffman and parts at B.T.I., along with somesystem sales. From that standpoint, we continue to see business beingrelatively flat, possibility of it being down slightly, depending if thenegativity continues on the semi side into 2008, that that could happen. Order pipeline is okay. I mean, it’s pretty stable andthat’s why we gave the type of guidance that we did in our press release.

[Ramesh Misra -Collins Stuart:]

Okay, just switching over into the consumables business thatyou’ve touched on, over there -- well, historically semiconductor wafer volumestends to be consistently growing. Can you address -- can you talk about whatthe short-term, near-term trends are on the consumable business? I recognizethat is more of a turns related business but if you can talk about theenvironment over there, that would be very helpful.

[Jong S. Whang:]

We experienced some slow bookings, some [to early fall], butwe saw some small spike in the past about month or two and I think wafer usageby our semi customers volume wise and they show single-digit increase overaverage increase each year. So we look at that market doesn’t have any muchvariance and it will be steady to growth, much in line with the volume growthin solar wafer supply chains.

[Ramesh Misra -Collins Stuart:]

Okay. I’ll just add one more brief question; can you talkabout your efforts potentially into expanding your product line into thein-line space rather than the batch furnace?

[Jong S. Whang:]

There is no question that Amtech needs to have and must havein-line [precision] product but beside that and -- that we are, the managementestimate that the in-line market will grow significantly in 2010, year 2010. Sowe are gearing [our product] for 2010 timing for our in-line product to beready for market.

[Ramesh Misra -Collins Stuart:]

Okay, so is this through internal development primarily orare you even looking at non-organic --

[Jong S. Whang:]

I think right now, we are looking at internal and external.The partners are coming together to really address the in-line decisionperformance to match our current batch processing, the qualities and so it is acombination of the internal expertise and also the external partner comingtogether as a really stronger team to address that development work.

[Ramesh Misra -Collins Stuart:]

Okay, and then just a brief clarification on this; so youexpect in-line to be a meaningful portion of the market, of the diffusionmarket, in 2010. Where do you see in-line diffusion as an overall proportion ofthe diffusion market the same early part of 2008 or even 2007?

[Jong S. Whang:]

2008, I think the split will be very marginal and it will be[batch] shaped horizontal dominant. [One more] scenario will play out for 2008and I also expect that 2009, that that share will be strong but for 2010, and Iam prepared to face a 50-50 split on 2010. If we look at the announcement we made in the 200-megawattexpansion plan that we received $15 million order, [inaudible] respectful andwell-recognized solar cell player, and we will not competing with the in-lineproduct. It was an old [batch] [inaudible] bidding process and so the in-linehas some I think hiccup -- I will call it as a hiccup but I believe they areworking, all in-line people are working very hard to continue to present thecase and trying to make a stronger in-road. It is an ideal manufacturingset-up. That’s why we believe that the in-line decision product has to be partof our portfolio going into 2010.

[Ramesh Misra -Collins Stuart:]

Okay. All right. Thanks for the time that you’ve allocatedto me. I’ll jump off and let others to come on. Thanks.

[Operator:]

Thank you. Our next question comes from the line of ColinRush with Broadpoint Capital.

[Colin Rush -Broadpoint Capital:]

Good afternoon. I just want to clarify the backlog briefly;so you’ve got the 17.4 that you ended the year with, plus the additional 19that you’ve announced September 30th, so I’m looking at a little over $36million in solar orders for ’08. Is that correct?

[Bradley C. Anderson:]

If you take 17 plus the -- yeah, you’re right.

[Colin Rush -Broadpoint Capital:]

Okay, and you are expecting to ship all of that in fiscal’08, correct?

[Bradley C. Anderson:]

That’s correct.

[Colin Rush -Broadpoint Capital:]

Okay, and then on the sales process with the customers,really what are the critical variables that your customers are asking you aboutor concerned with when they are looking at an in-line tool versus a batch toolat this point?

[Jong S. Whang:]

I think most of the important -- the criteria andspecifications they are looking for is two things; processing quality, whichactually leads into affecting the higher conversion rate, efficiency rate, andalso throughput. And I believe the throughputs probably -- the in-line willhave an edge over the batch. That’s the ideal set-up and the -- my experiencewhen it comes to decision process itself that goes on to solar wafers and Ijust happen to believe that the batch processing products that we offer has amore consistent processing quality and eventually leads into higher efficiencyrate the customer is looking for.

[Colin Rush -Broadpoint Capital:]

And how do you quantify that trade-off at this point?Because obviously at the end, you are looking at how many watts come off thoselines in a given year. Is there a simple rule that you typically use or areable to share with us or for investors to understand that kind of trade-offthat the customers are looking at?

[Jong S. Whang:]

No, we are not able to do that and we would love to do itbut we don’t have our internal laboratory to have a comparison and the data.What we depend on is the customer’s [inaudible] or the feedback and customers’actions and what we see is there is more than one case that we’ve experiencedthe customer is coming back to the batch from the in-line setup they previouslyhad. And so just based on the customer’s actions toward our batch [inaudible]performance, is an indication, an actual tangible, the bookings that they wereproviding us that sense of what a customer is really desiring.

[Colin Rush -Broadpoint Capital:]

And then, looking at the lifecycle for this equipment, ifyou look at the return on investment for some of these solar cell lines, thereturn could be in a year or two. It’s pretty quick. So where are you expectingthe life cycle to be or the life time for these lines to be before you might beable to sell a new tool into those customers to replace old tools?

[Jong S. Whang:]

Are you talking about the lifespan for our batch components?

[Colin Rush -Broadpoint Capital:]

Exactly, yes.

[Jong S. Whang:]

Typically through the long history in our semi market thatwe are serving and our equipment typically was [staged out], continuedperforming for more than 10 years. In some cases, a lot more than 10 years.

[Colin Rush -Broadpoint Capital:]

But do you see the technology moving quickly enough andsignificantly enough as the solar industry becomes more commoditized, thathaving a half percent or a single point of efficiency improvement would warrantreplacing a tool?

[Jong S. Whang:]

I think that share of horizontal [furnace] will be reallystable workhorse for a long time and I believe the customer will be happy forquite a long time. I am sure their expectation is to use it for 10 years or so,like what they saw in semi experience. However, the solar, they were puttingthrough many, many times more wafers through the solar, the same type of amachine and so I think the jury is still out there, since the solar is a fairlynew industry and whether it will last another 10 years and the customer will behappy with it or -- but my expectation is that it definitely is a [inaudible]over five years, close to 10 years.

[Colin Rush -Broadpoint Capital:]

Okay, and then a couple of your customers have recentlycompleted financing and that’s pretty big capacity additions in China. What canyou tell us about the pipeline of potential new contracts that we might seeover the next quarter or so?

[Jong S. Whang:]

Without going into specifics, we continue to be encouragedand excited about the pipelines that we see on a daily basis and very healthy,what’s in the pipeline and what is outside of the pipelines. As to the [inaudible] expansion program that customers areannouncing, I am hoping that they will all be able to meet their timelines thatthey are desiring. However, that will be limited by the silicon [and location]that they will receive, since there is really limited solar silicon beingproduced. So it depends on what allocation they will be able to securefrom the total part and actual expansion will be dependent on that.

[Colin Rush -Broadpoint Capital:]

I think that’s it for now. Thanks so much.

[Operator:]

Thank you. Our next question comes from the line of Rob[Avenic] with [Todd] Investments. Please go ahead.

[Rob Avenic:]

I would like to get a sense for your guidance for next yearand put it in the context of what the company has accomplished over the lasttwo quarters. From where I sit, it looks like over the last two quarters,Amtech has generated about $26 million in revenues and on that $26 million, ifyou back out stock-based compensation and the change in your deferred profit,and think about that in terms of kind of a pretax operating cash flow number,it looks like $3.2 million on those $26 million in revenues, which is north of12%. When I look at your guidance, it would suggest that there issome deleverage to the SG&A line and what I would like to get a sense foris what’s causing that? Is it accounting convention? Is it the increase indepreciation, amortization? Is it an increase in stock-based compensation? Becauseif you look at the last two quarters as a proxy, you had a company on arun-rate of let’s call it $52 million that was generating kind of a normalizedEBITDA number of $6.4 million. And on the incremental $15 million to $20million of which you guys are projecting for next year, I’m not seeing thatsame kind of marginal drop to the pretax line, so I would like to hear somecomment on that.

[Bradley C. Anderson:]

Sure, Rob, and I appreciate the insight looking at thecompany. A couple of things; in 2008, we are expecting additional costs relatedto the Sarbanes-Oxley compliance. 2008 is the first year for us to domanagement’s assessment but the SEC in their kind way made it so that we haveto do both our assessment and the auditors have to do their assessment in thesame year, so we are getting hit with basically both sides of the SOX comps inone year, in 2008. So that’s part of that. There is depreciation and increaseddepreciation/amortization related to primarily the R2D acquisition and the, toa lesser extent, the new facility in The Netherlands. Just to kind of give aflavor for that, it used to be when you bought a company, you just allocatedyour purchase price, the excess purchase price to goodwill. This day and age,you’ve got to allocate purchase price to everything down to backlog and you’vegot [certain values] by the backlog that you have to amortize and that has avery short life on it, the backlog piece, so that does have some negativeimpact on the leverage model going into 2008.

[Rob Avenic:]

So just to put a little bit of detail on it, and I’m nottrying to back you into a corner, but if you looked at stock-based compensationand projected depreciation/amortization for next year, what does that looklike?

[Bradley C. Anderson:]

I think overall the amortization, I think you can get tothese numbers based on last -- look at the cash flow statement. I think we had$700,000, $800,000 of amortization/depreciation. And if you look at thepreliminary purchase price allocation in our notes to the financials and assumesome kind of depreciation rate on the new building, you can get to the pointwhere depreciation/amortization could increase another $800,000 in 2008.

[Rob Avenic:]

Okay, and stock-based compensation, how would ’08 lookrelative to ’07?

[Bradley C. Anderson:]

That one’s a little more difficult from the standpoint ofthere really isn’t any public information out there but with obviously theadditional options outstanding and other stock compensation, there will beagain a significant increase on that side too.

[Rob Avenic:]

And how about these non-recurring Sarbanes type expenses?

[Bradley C. Anderson:]

Well, unfortunately I wish they were non-recurring. I thinkhopefully they will be more efficient, we will be more efficient going into theyear two, but year one, you know, there’s a lot of ranges out there of peoplethat have given and surveys that have been done on expenses that range anywherefrom -- I’d say the low end that people have said publicly out there in surveysthat I’ve seen that said about $0.5 million to the low end.

[Rob Avenic:]

And typically, year two and out, it’s half less than that?

[Bradley C. Anderson:]

No, it didn’t go down 50%. I think I’ve seen maybe a thirdin year two.

[Rob Avenic:]

I guess the point of going through this exercise is thecompany is clearly a robust company at this point and I think -- I guess froman accounting standpoint, what you are projecting probably masks some of thetrue health of the underlying business in terms operating performance becauseof some of these accounting and somewhat non-recurring expense items.

[Bradley C. Anderson:]

Yeah, I appreciate having that insight of our operations. Iguess there’s -- there are several components in there in the SG&A.

[Rob Avenic:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of TomSchwartz with Collins Stuart. Please go ahead.

[Tom Schwartz -Collins Stuart:]

I think Ramesh’s many questions and the other fellowbasically took care of what I wanted to find out about, so I’ll pass to thenext person. Thank you.

[Operator:]

(Operator Instructions) There are no further questions. Iwould like to turn it back to management for closing remarks.

[Bradley C. Anderson:]

Thank you for joining us today. We look forward to reportingto you on our progress and appreciate your continued interest in Amtech. Thisconcludes today’s call.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude today’sconference. Thank you for your participation and for using AT&T. You maynow disconnect.